Question

What are the factors affecting Working Capital? Please answer fast, I have test 2morrow

Answer 1

The working capital requirements of an enterprise depend on the following factors :-


✯ Nature of Business :- Manufacturing firms require considerable working capital as they have to build up stock of raw materials and finished products. On the other hand, public unity undertaking require less working capital as they do not have to maintain inventory.


✯ Size of Business :- Firms carrying on large scale operation and undertaking high volume of production require more working capital than small scale firms. For example, A departmental store needs greater amount of working capital as compared to a hawker. 


✯ Manufacturing Cycle :- It means a time involved in the production of goods. Longer is the time gap between the purchase of raw material and production of finished goods, higher is the need for working capital.


✯ Rapidity of Turnover :- Turnover means the speed with which the amount of working capital is recovered by sell of goods. The turnover is rapid, the amount of working capital required is small. This is because Working Capital is locked up in business for a short period.


✯ Terms of Purchase and Sale :- A business firm requires comparatively small amount of working capital if it buys goods and services on credit and sells them in cash. On the other hand, if it purchases in cash and sells on credit, larger amount of working capital will be required.


✯ Credit Policy :- When a liberal credit policy is followed, more working capital is required. On the contrary, smaller working capital is needed in case of a tight credit policy. 


✯ Operating Efficiency :- Better utilization of resources to reduction in cost and improves profitability. As a result need for working capital is reduced. High profit margins and flow of regular income from sales also reduce the amount of working capital required in business.


✯ Goodwill of Business :- An enterprise enjoying good reputation in the market can easily and quickly obtain short term loans from economical banks. It requires a less amount of working capital.


✯ Growth and Expansion Plans :- A growing and expanding firm required more working capital than a stagnant firm.


✯ Seasonal Variations :- Working Capital requirements of business which are subject to seasonal variations are comparatively high during a particular season. For Example :- A raincoat company will required more working capital during rainy season.


✯ Cyclical Fluctuations :- Cyclical changes create emergency demands for working capital. During boom period there is need for larger working capital to support higher.



Please mark it brainiest answer............................................................